Mastering The Market Cycle: Getting the odds on your side

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Businesses with high fixed costs and low variable costs will experience large swings in profitability based on changes in overall sales, while companies with low fixed costs and high variable costs will remain more or less equally profitable in good times or bad. Howard Marks is one of my favorite writers on investing and I enjoy reading his memos throughout the year. Mastering the Market Cycle has insights for learning to see the big picture in the economy and investing. Hypothetical Performance Disclosure: Hypothetical performance results have many inherent limitations, some of which are described below. no representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. for example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results. During this stage, investors are more likely to sell their assets at a loss, as they believe that the market will continue to fall. It is difficult to make frequent and correct distinctions about the market when it is in the middle ground between rich and cheap. Detecting and exploiting the extremes is really the best we can hope for.

Company’s gains can lead to losses and losses can lay the groundwork for gains. There is a cycle in business success. Chapter 17: The Future of Cycles To refuse to buy when too positive psychology and the willingness to assign too high valuations causes prices to soar to peak levels. This is true for the financial crisis. Mastering The Market Cycle provides the case study of the GFC in 2007-2008 occurred largely because of the issuance of a huge number of unsound subprime mortgages and that took place in turn because of excessive optimism. A shortage of risk aversion and an overly generous capital market. Which led to unsafe behaviour surrounding subprime mortgages. However, it is important to note that the bull market stage can be followed by a bear market, as conditions change and investor sentiment shifts. 7 – The Overvaluation Stage Everyone feels these emotions, but the superior investor does their best to keep these emotions in balance at all times rather than swinging between one and another with the market.And you know, the subtitle of the book I like a hell of a lot more than the title. The subtitle is 'Getting the Odds On Your Side' , and that's what I think ... You know, we never know what's gonna happen in the markets. We never can be sure of an outcome, but I think we can get the odds on our side by understanding where we are in the cycle. Now that's all a preface to your question. Where are we in the current cycle? Well, you know, I put out a cautionary, I wouldn't say bearish, but a cautionary memo in July of '17, and then I repeated it again in September or October of '17 and then again in July of this year. Alan: Okay, so next question from the audience. This is a reader of your first book, The Most Important Thing, and the question is: do you now know what the most important thing is? The question is based on the conclusion of your book. The boom stage of the market is characterized by a period of rapid growth and increased investor optimism. This panic can exacerbate the decline, as more and more investors sell their assets, creating a self-fulfilling prophecy. 4 – The Bear Market Stage But on the other hand, when the market goes down and fundamentals are negative and prices are retreating and people feel worse and worse and worse, that's when they should be buying, but that's when they're getting more and more depressed. So you have to be a contrarian, and one of the ... Contrarianism takes many forms, but I think the most important form of contrarianism is refusing to succumb to the same emotions that are driving the market. We are all, including me, we are all subjected to the same influences. We all read the same news. Well, some of us only read from the left, and some only from the right, but there aren't an infinite number of media outlets. We all hear the same facts, or alternative facts. We all see the market going up or down the same. We all make money or lose money at a given point in time.

This stage is often followed by a market crash, as investors realize that the prices of assets are not sustainable. 8 – The Correction Stage So let’s go through each chapter of the book and summarize the main arguments. I’ll provide some of my own color commentary as we go along, too. Table of Contents Cycles are inevitable. The stages of a cycle do not just follow one after the other; each stage is caused by what happened before. Marks uses the rise and fall of the distressed debt cycle to illustrate:Understanding and being alert to excessive swings is an entry-level requirement for avoiding harm from cyclical extremes, and hopefully for profiting from them. Marks defines credit broadly as the ability of a company to raise money, in the form of debt or equity, to finance a business. During this stage, investors are more likely to adopt a wait-and-see approach, as they believe that the market will continue to fall. However, this optimism can be dangerous as it can lead to overvaluation and a subsequent market crash. 2 – The Bubble Stage – Thrill and Euphoria